Time to Consider a Collective Trust?

March
7, 2014 (PLANSPONSOR.com) – One retirement plan service provider says
collective investment trusts (CITs) can be a powerful answer to demand for
customized target-date vehicles and less expensive investment strategies.

For those who need a crash course in CITs, Kent Buckles,
executive vice president of retirement strategies for Reliance Trust, says the
products often serve as an alternative to mutual funds. CITs are investment
vehicles in which assets from multiple plans can be commingled into one trust.Each
CIT is managed professionally on behalf of those plans and not open to the
public. For that reason, they’re only available as an investment option within employer-sponsored
plans that have negotiated an agreement with the CIT provider.

Another defining characteristic of CITs is that they are
regulated more as a banking product than an investment fund, Buckles says.
Therefore the products fall under the oversight of state banking regulators and
the federal Office of the Comptroller of the Currency (OCC), rather than the
Securities and Exchange Commission (SEC). The OCC regulators are rigorous in
their examinations of trust companies and CITs, he says, but providers in the
space are advantaged in that the OCC requires less documentation and
pre-approval compared with the SEC.

Buckles says the appeal of CITs for plan sponsors and
fiduciaries is generally a lower expense profile and an improved ability,
especially for larger plans, to create unique investment funds that address the
needs of real plan participants in a more refined way then retail target-date
funds. This can be accomplished because the sponsors can work directly with
fund managers to discuss and meet the investing needs of their participants,
factoring real-world demographic data into portfolio design decisions. Mutual
funds, on the other hand, tend to make portfolio decisions based on much wider
demographic considerations.

CITs
have historically been used in defined benefit (DB) plans and in the larger defined
contribution (DC) and profit sharing plans. DC plan sponsors moved away from
CITs as retirement plan administration moved to daily valuation. CITs weren’t
priced daily or traded daily, but that issue has disappeared. Today CITs trade
on the same platform as mutual funds. Internet connectivity allows plan
participants to track performance of their CITs on a daily basis.

“The growth really isn’t all that different from what you
see happening in other parts of the industry, which is to say it’s strong,”
Buckles tells PLANSPONSOR. “You never know exactly what the numbers are in
total, but based on the research that we see, the growth seems to be pretty
dramatic for collectives overall. Especially within the defined contribution
space and among more of the smaller plan segments.”

A 2013 survey by financial research and consulting firm Celent
found, from 2006 to 2010, the share of collective trusts as a percentage of the
defined contribution market doubled—from 10% to 20%. In actual dollars, the
jump was from $400 billion to $900 billion, the survey report, “The Defined
Contribution Market,” noted.

At Reliance Trust, assets in CITs have grown from a small
portion of the firm’s $100 billion in total assets under management to about $6
billion since the firm first introduced a CIT product more than a decade
ago—with most of the growth coming from a significant acceleration in the last
three years. Buckles says Reliance’s developments in the field have largely
paralleled the wider industry movements, both in terms of annual growth and the
type of products that sponsors are interested in.

“The first collective fund we offered was a stable value
fund—and we have stable value funds that we still sponsor,” Buckles says.
“Beyond that, we have moved into offering funds in the fixed-income space, real
estate, and stand-alone large cap equity funds, and of course the target-date
offerings are becoming increasingly popular.”

In general, Buckles says the streamlined reporting
requirements and the elimination of excess administration possible through a
collective trust arrangement allows participants to access diversified
investment funds at a 10 or 15 point discount compared with mutual funds that
take similar strategies. He has seen examples where plans have been able to
replace actively managed mutual fund options with more passive-based CITs,
cutting as much as 50 basis points from investment costs.

Another
point Buckles is quick to make about CIT growth is that it’s not just coming from
the large DC plans and big pension funds that have traditionally had the asset-muscle
to benefit from economies of scale via access to preferred share classes.

“In the smaller plans, what’s attractive about the
collectives is that because they are comingled, you don’t have the limitations
that you’ll have with an institutional fund on the mutual fund side,” Buckles
explains. “So if you want to offer a low-cost institutional mutual fund,
usually you’re going to have some type of a minimum amount before you’ll be
able to invest in the best share classes. You don’t have that issue with the
collective arrangement.”

That’s because the trust company providing the CIT serves as
both the fund trustee and administrator—delivering many of the pieces that are
required to bring the products to participants and the marketplace, such as
daily valuations, fund fact sheets, Morningstar updates, and all the related
legal documentation. When all of those functions are brought under one roof,
they can be done more efficiently.

“So we are the manufacturer, not so much the distributor,”
Buckles explains. “Though we do have some wholesalers that talk to advisers
about our offerings, generally speaking the distributors are really the recordkeeping
platforms, the independent advisers, etc.”

Buckles says plan sponsors also tend to be attracted to the
fact that, in its role as a trustee of assets earmarked for a CIT arrangement,
the provider becomes a plan fiduciary.

“For
that reason, we’re directly liable if there’s anything that’s found that’s not
in compliance with the OCC regulations,” Buckles says. “That’ means we’re
aggressively self-policing, and each of our funds has to be audited by a third
party at least once a year.”